Tag Archives: investment advice

Smart Retirement Income Strategies

retirement-exit-2My Comments: This comes from the staff at Financial Planning, a well known magazine that appears monthly and is subscribed to by financial professionals. It contains valuable information for anyone soon to be retired or even already retired. These are summaries and if you want to read the full article, reach out to me and I’ll help.

Financial Planning Staff / SEP 17, 2014

Clients worried about longevity, unknown health care costs and a persistent low-yield environment are increasingly turning to their advisors for solutions. As they near retirement, many are eager to address their future cash-flow needs. Based on our reporting, here are some of the best ways advisors can help clients generate income in retirement.

Delaying Benefits to Avoid ‘Tax Torpedo’ on Social Security

Many people who need retirement income in their 60s claim Social Security then, supplementing those benefits with IRA withdrawals if necessary, according to Mark Lumia, CEO of True Wealth Group in Lady Lake, Fla.

A double tax on Social Security benefits and IRA withdrawals has been called the tax torpedo; to reverse the process, seniors can delay Social Security until age 70 while using IRA funds for spending money until then. The later a client starts Social Security the larger the benefit will be, so smaller IRA withdrawals can generate the total required for retirement income.

“The formula for determining the tax on Social Security benefits includes IRA distributions in full but only half of Social Security benefits,” says Lumia. Thus, increasing Social Security by waiting until age 70 and consequently reducing the desired IRA withdrawals can dramatically lower the tax on Social Security benefits.

Lumia calculates that a retired couple with $97,000 of income ($70,411 in Social Security after delaying benefits to age 70 plus $26,589 from their IRA) would owe $6,492 less in federal income tax than a retired couple with the same $97,000 income receiving $40,006 in Social Security benefits after starting early plus $56,994 in IRA distributions. Over an extended retirement, such tax savings can be substantial.

When It Pays to Recharacterize a Roth Conversion

Tax-free Roth IRA distributions can be a valued source of retirement income; withdrawals are completely untaxed after age 59-1/2, assuming the account is at least five years old. However, building up a Roth IRA recently hit a snag thanks to the Affordable Care Act. “For some clients, dealing with the Affordable Care Act (ACA) exchanges adds another dimension to Roth IRA conversions,” says Marty James, a CPA/PFS who heads an investment and tax management firm in Mooresville, Ind. “Lost health insurance tax credits can increase the effective cost of the conversion.”

A Roth IRA conversion creates more taxable income. Higher income, in turn, might cost certain clients health insurance discounts, adding sharply to the premiums they’ll have to pay. One possibility is recharacterizing the Roth IRA conversion back to a traditional IRA which will wipe out the associated increase in health insurance costs.

“We’ll also look at investing in an oil and gas program that provides first-year deductions, to offset some of the increased income,” says James. In any case, it’s likely that this couple will postpone or sharply reduce Roth IRA conversions until they reach age 65 and become eligible for Medicare.

Rethinking the 4% Rule
By now, most advisors have gotten the memo: the long-held conventional wisdom about 4% annual withdrawals from retirement accounts no longer reigns supreme in the face of longevity projections and predicted long-term stock market returns.

“I have got 25 years of experience” and “my average client is nearly 60 years old,” says Roger Kruse, who owns FFP Wealth Management, a Minneapolis-based firm. With that kind of time helping clients, many of whom who have lived out most of their retirement years, he has come to recognize that –and “this is incredibly obvious,” Kruse says, “People spend less money as they age.” Why? “You travel less, you drive less and your out-of-pocket spending decreases,” Kruse says.

Looking to Dividend Stocks
When trying to help clients generate income in retirement, advisors may want to shift their focus from domestic stocks.

“We believe that that the lion’s share of a client’s equity holdings should be in large, cash-rich multinational companies,” says Greg Sarian of the Sarian Group at HighTower Advisors, a wealth management firm in Wayne, Pa. “We are in the mature stage of the economic cycle, so large-cap stocks may have better prospects now than small- or mid-caps.”

The tax tail shouldn’t wag the investment dog, as the saying goes, and Sarian sees much more than low tax taxes to like about dividend-paying stocks these days. “Dividends are increasing at many companies,” he says, and that may continue to be the case.

Writing Covered Calls
Does implementing a covered call strategy make sense as a way to provide some income for retired clients?

“Absolutely,” says Nick Defenthaler, a planner at the Southfield, Mich.-based Center for Financial Planning, “But it’s important to point out that although writing covered calls for income is certainly one of the most conservative option strategies, it still contains risk. The premiums received are guaranteed upon writing the call but the underlying stock could plummet and lose substantial value during the contract period.”

Defenthaler favors writing calls on a stock that has appreciated in value and the client is willing to sell. “Why not write some options for additional income?” he asks. “If the stock gets called away, profit was still realized and income was also generated. The client, however, must be aware of and comfortable with the possibility of the underlying stock losing value during the option’s contract period.”

Combating Inflation
Partly because of continued growth in the U.S. economy coupled with the winding down of the Federal Reserve’s bond-buying program, the risks of continued low inflation are diminishing.

Widely followed Rick Kahler, president of the Kahler Financial Group in Rapid City, S.D., is telling clients it’s necessary to maintain exposure to asset classes that can outpace inflation in the long-term when interest rates rise –including equities.

“Retirement isn’t a time to pull back and load up on fixed-income investments and immediate annuities,” says Kahler. “Our clients’ investment portfolios need to recognize that inflation is built into our flat monetary system.”

Boosting Revenue With Real Estate Income?
Warning signs flash in most advisors’ eyes when retired clients enter their office with visions of creating extra income streams from real estate ventures.However, not all advisors feel that way.

Rich Arzaga, the founder and CEO of Cornerstone Wealth Management in San Ramon, Calif., embraces real estate investments for his retired clients.

“I think there is real opportunity to help these people out,” says Arzaga who teaches a course in real estate and financial planning at University of California, Santa Cruz. Other advisors say “no” to clients’ proposed real estate investments because the advisors “don’t know that asset class.” But, he says, “It’s a real disservice to clients.”

He does warn his retired clients to treat real estate investments, “like a business.” What does that mean? “Don’t fall in love with the property or the tenant,” he says.

Seeking Alternatives to Energy MLPs
For retirees, distributions from master limited partnerships have obvious appeal.
Thanks to rules set by Congress intending to attract long-term investors — rather than speculators — to pay for finding new sources of energy exploration and production, MLPs have the advantage that they don’t pay corporate income tax. As such, they act as “pass-through” entities, passing profits to investors in quarterly distributions.

But Judith McGee, who serves as chairwoman and chief executive of McGee Wealth Management, in Portland, Ore., an affiliate of Raymond James Financial Services, and other financial advisors dislike energy MLPs because of their illiquidity. “I’ve seen people really get stuck with these,” says McGee.

To have the investments perform at their highest rate of possible return and tax advantages, clients typically have to commit to keeping their stake in the MLPs for decades.
If her clients want a piece of the booming gas and oil discovery market, McGee prefers other energy investments, if those don’t pay the quarterly dividends. “There is a better way to play this. There are so many other options,” McGee says. She suggests some of the mutual funds that focus on natural gas pipeline investments or publicly traded energy companies. “Anytime one of my retired clients gets into something they can’t get out of quickly, I get worried,” she says.

Refining Bucket Strategies
If there’s a common denominator among bucket strategies in retirement planning, it’s the use of a sizable cash bucket. “We like to see retired clients with at least a year’s worth of needed funds in cash equivalents such as money market funds,” says Eric Meermann, client service manager with Palisades Hudson Financial Group in Scarsdale, N.Y.

Often, this mode of retirement planning groups a client’s other assets into fixed income and equity buckets. As the cash bucket is depleted, it might be replenished from the fixed income bucket, which in turn will be refilled from the equities bucket.

Other tactics could include using bond redemptions, interest income, stock dividends, or proceeds from capital losses to keep the cash bucket topped up. In any case, a bucket strategy for drawing down retirees’ investment assets needs a plan for refilling the cash bucket.

“In the drawdown phase, we use a client’s asset allocation to determine how to move money into cash,” says Meerman. “In 2008-2009,” he says, “when stocks fell sharply, our allocations became tilted towards fixed income. At that point, we wouldn’t use money from equities to restore a retiree’s cash position.” Instead, the firm rebalanced clients’ allocations, moving money from fixed income into equities, and retirees’ cash positions were refilled from fixed income rather than from equities.

And while clients’ asset allocations don’t typically vary as they go through retirement, there is still “some flexibility with these plans,” Meerman says. “If there’s a significant decline in a client’s wealth, perhaps in a bear market, we might suggest spending less, which would mean taking less from the portfolio.”

Shoeshine Boys and Thinking At The Margin

My Comments: When the last crunch time came in 2008 and 2009, I vowed to find a better solution for my clients. The idea of losing 30% or more of the value of your retirement holdings over the course of a few months is devastating. For many, it’s taken years to get back to where they were.

What I found was an investment manager in Tacoma, Washington, that takes what is called a tactical approach to managing money rather than a strategic approach. The strategic approach still works for pension funds, insurance companies and foundations. They know they are in for the long haul, and that if they own good companies and safe bonds, if they are down today they will be up tomorrow. Only their tomorrow can be several years down the road.

For many of us, tomorrow is just that. Or perhaps next month or maybe next year. In the meantime we have to be able to sleep at night. This requires an approach to investing that allows us to be in cash overnight, with a possibility of going short if the signals tell us that a downward trend is upon us.

The dilemma I face as an advisor is that taking this approach means that you don’t capture all the upside, and clients are critical as they feel they are missing out on some of the historic upswing. I try to tell them it won’t last, but some of them don’t believe me. But I’ve been posting articles lately that suggest a reversal is soon to come. These comments by Joseph Calhoun bear me out. If you are worried about your circumstances, give me a call, and I’ll try and share with you what I think is likely to work in your favor.

Joseph Calhoun / Sep. 29, 2014

It is said that Joe Kennedy got out of the stock market in 1929 because he started to hear stock tips from his shoeshine boy. Bernard Baruch had similar feelings: When beggars and shoeshine boys, barbers and beauticians can tell you how to get rich it is time to remind yourself that there is no more dangerous illusion than the belief that one can get something for nothing.

What Baruch was pointing out was that the marginal buyer of stocks – the shoeshine boy – really didn’t know much about the markets and was most likely buying for reasons that had little to do with the underlying fundamentals. The shoeshine boy was buying because the market was going up and he saw it as an opportunity to get rich and stop shining the shoes of Bernard Baruch and Joe Kennedy. He was buying not because he believed the economy would perform well in the future or because he had some deep understanding of the fundamentals of the companies in which he was buying stock. He was buying because everyone else was doing it and getting rich and he wanted to claim his piece of the profits.

I have said many times that the economy is not the market and the market is not the economy. What I mean by that is that current stock prices are not just a reflection of the current economic data but also incorporate a view of the future economy. It is only in the future that you will find out whether that view of the future as captured in stock prices is correct. But whose view of the future economy? In 1929, for Bernard Baruch and Joe Kennedy, it was the marginal buyer, the shoeshine boy’s view of the future that was moving prices. And they were uncomfortable staking their fortunes on the views of the shoeshine boy or the barber or the beautician. So when I look at markets – any market – I always try to think through who the marginal buyer is, who is moving prices.

You don’t see shoeshine boys much anymore so we can’t just go down for a shine and ask him about his views on the market or the economy. But it is still possible, to some degree, to suss out who the marginal buyer is and judge whether you want to risk your capital on their opinion of the world. I remember reading an article in the Miami Herald in about 2006 that showed pictures of people camping out in a tropical storm for the chance to purchase a pre-construction condo.

Those were the people driving up the price of housing and that’s when I knew there was something seriously wrong with the housing market and that it probably wouldn’t end well. Normally rational people had seemingly lost their minds in pursuit of riches in the condo market.
They were the shoeshine boys.

I had similar feelings about stock buyers in the late ’90s when there were numerous articles about people quitting their day jobs to day trade full time. For me that brought back memories of an old trader who told me early in my career that one “shouldn’t bet the milk money on the markets.” Of course, just because the shoeshine boy is buying stocks that doesn’t mean that they are due for a fall. There may be a supply of shoeshine boys or day traders who have yet to commit their milk money to the market. It isn’t until the market runs out of shoeshine boys or to put it in the modern lexicon greater fools that the market will shift.

All markets are about the tug of war between bulls and bears and it is the marginal participant that makes the difference. If the market is in equilibrium and the bulls on one end of the rope can coax a bear to come over to their side, the market will rise. If a bull pulls a muscle, the market rope may move toward the bears. It doesn’t take all the bears or bulls to go to one side, only a sufficient number – enough at the margin – to tip the scales. And the rope will continue to move in the direction it is going until a sufficient number of rope pullers, bears or bulls, switch sides and a new equilibrium is reached at a new price.

I don’t think we are at the shoeshine boy level in the stock market just yet, but we do seem to be moving in that direction. The group on the sellers end of the rope over the last 18 months are private equity firms, venture capital firms and corporate insiders. The buyers end of the rope is populated by individuals, companies buying back their own stock and that of other companies (takeovers). The question you have to ask yourself is which team you want to be on; who do you want your teammates to be? The buyers have a poor long-term track record while the sellers are a pretty savvy group overall. Do you trust the companies buying back their own stock with company money or the insiders exchanging their own stock for cash? Whose view of the future is likely to be correct? The venture capital firms shoveling out IPOs at a pace second only to the peak of the dot com mania? Or the people scrambling to get in on the latest hot IPO with dreams of Alibaba riches in their heads?

We should also consider the divergent views of the bond and stock markets. The bond market shows high yield spreads widening, inflation and growth expectations falling and the long end of the yield curve flattening to levels last seen in the early months of 2009. That is a fairly bleak view of the future. The stock market would seem to be predicting the opposite, an acceleration in growth and profits that justifies paying above average multiples for stocks. It seems unlikely that both markets can be right but we don’t know yet which one has the correct view of the future. It may be that as the biggest marginal buyer of bonds – the Fed – stops buying that the bond market will shift to mirror the view of the stock market. But with the Fed reducing bond purchases all year and the bond market rising anyway, it appears there are still sufficient buyers at the margin to replace the demand of the Fed.

One warning sign for both stock and bond investors is the recent rise in volatility. It started first in the currency markets and is now starting to move to stocks and bonds. Volatility is essentially the opposite of liquidity so the rise in volatility is a warning that liquidity is drying up as the Fed ends QE. That is consistent with what we saw at the end of previous periods of QE and the view that tapering is indeed tightening and those trying to time the first rate hike are concentrating on the wrong thing. We won’t have to wait long to find out as the Fed will end their bond and mortgage purchasing next month.

Who will win the tug of war in the bond and stock markets? I don’t know of course since I can’t see the future. But like Bernard Baruch and Joe Kennedy, the marginal buyer of stocks right now makes me uncomfortable. Greed is the dominant theme of these buyers with FOMO (fear of missing out) driving their purchases. It may be that the bulls can continue to coax more bears to the bull side of the tug of war but the bear side of the rope is getting pretty thin. Did you ever see what happens when one side in a tug of war gives up?

“Are We There Yet?”

108679-bruegel-wedding-dance-outsideAs a parent, I remember this question well from days past. This time, however, it’s being asked by those of us with money invested in the global stock and bond markets.

All of us are following a life path that includes stops along the way. Some stops we choose to make and others are forced on us. Some of them are in good places and others not so good places. These comments talk about a bad one on the horizon and how your life might be better if you don’t have to stop.

Sometime soon, most likely in the next three 3 years, many of us will hit a road block. With that in mind, what follows is designed to help the reader gain a better understanding about how to have money positioned before that happens. This is particularly important if you are soon to be, or are already, retired.

In retirement, your investment focus will shift away from the accumulation of money and focus instead on the distribution of money. That’s not to say your money will no longer accumulate, but the emphasis will change. This is because instead of you working FOR money, money now has to work for YOU.

None of us individually has any control over the markets. What we do have is control over where and how our money is working for us. For almost everyone, the rules that define successful accumulation are different from the rules that define successful distribution.

Two primary drivers that define success in either phase are the stock market and the bond market, which is driven by interest rates. Knowing more about why this is relevant is in your best interest. You will also find it’s in your best interest to avoid the coming road block if you can.

Let’s first look at interest rates. Following this paragraph is a chart that shows the general level of interest rates in the U.S. over the past 222 years. In that entire time, you see four high points in green and low points in orange. The time span from high points to low points has been 27 years, 37 years and 26 years. The last high point was in 1981, 34 years ago. What this suggests to me is that with current interest rates near zero, an upturn in rates is going to happen. How soon is up for debate, but inevitable.
200+year interest ratesWhen interest rates rise, the effect on bond values is negative. No one is going to pay you as much for a bond that yields 4%, if with the same money they can buy a bond that yields 5%. This is a fundamental law of finance. Before the shift happens, you should be out of bonds and into cash or into tactical approaches that help you avoid losses.

Let’s now look at the stock market. Instead of individual stocks, I’m going to focus on the S&P500 Index, widely regarded as representing the entire US stock market. It includes the 500 largest capitalized companies in the US, many of whom sell globally, so their performance to some degree reflects what is happening across the planet.

The next chart reflects the closing price of the S&P500 on every given trading day over the past 40 years. These years largely reflect how the dollars you had invested in the stock market performed as it accumulated. Your goal at the time was to grow your pile of money as large as reasonably possible.

Retirement was down the road, and if a road block happened, it didn’t matter so much. What you heard everywhere was “buy and hold” or “hang in there”. But now the rules are different and the big question you must ask is “When Will The Next Downturn Happen?”. Or perhaps “Are We There Yet?”.

1974-2013 SP500From 1975 -1982, the rise was imperceptible. Then it started upward and in spite of what happened in 1987, it was a lot of fun. Then came the internet bubble that burst in early 2000 and we all experienced the pain associated with large declines in our account values.

Next came the mortgage bubble that burst in 2008-2009. Again there was a lot of pain and some of us are still recovering from that episode. For the past 3 years we’ve been watching what appears to be an inexorable climb up above previous historic highs.

I try to avoid promoting a sense of fear. However, there seems to be an inevitability about the fact that sometime, most likely in the next few years, there is going to be another bubble. Again there will be widespread pain and fear and gloom across the country, if not the entire planet. Perhaps a better question to ask is “Are You Ready For It?” Or maybe “When it Happens, Will You Be Able to Sleep At Night?”

My point is to cause you to evaluate or re-evaluate what you are doing now and consider options that will eliminate some of the pain that is sure to come, and to consider options that might even cause your accounts to grow.

While all of this is speculative, it is based on historical experience. And unless you plan to be dead in a few months, how all this plays out could dramatically influence your peace of mind and financial freedom in the years to come. Not to mention the financial freedom of those you leave behind.

All of us have different pain thresholds. The more money we have compared to our accepted standard of living, the less likely the pain. What you choose to do with your life in retirement, however, is up to you.

If you take appropriate steps to protect yourself, then chances of a succesful retirement from a financial perspective are better. Living a life free from fear about your financial future is possible.

It’s up to you what you do. But I encourage you to believe acting sooner rather than later will be in your best interest.

(The charts were found at finance.yahoo.com)

by Tony Kendzior, CLU, ChFC / October 1, 2014





A Crisis Less Extraordinary

080519_USEconomy1My Comments: For those of you who can stomach economics and the sometimes arcane language of investments, this is an interesting analysis. It comes from a source called Seeking Alpha where I have a membership. Their articles are also infused with lots of charts which I often choose to leave out.

So if for any reason you cannot get to their site to continue reading and see all the accompanying charts, let me know and I’ll forward to you a PDF file with the full article. All this is to help you get ready for the next downturn which will happen.

Eric Parnell, CFA, Gerring Capital Management Aug. 14, 2014

• It is often said that the financial crisis that was unleashed from July 2007 to March 2009 was a once in a century event.
• But upon closer examination, the market shock resulting from the financial crisis was not all that extraordinary.
• In fact, it was rather modest in many ways when compared to other major historical bear markets.
• And this fact alone may be setting investors up for a far more challenging bear market experience the next time around.

It is often said that the financial crisis that was unleashed from July 2007 to March 2009 was a once in a century event. Some investors even take comfort in this notion with the belief that any future stock bear markets will almost certainly pale in comparison. In short, if one could survive the financial crisis, one can certainly weather what may come in the future. But upon closer examination, the market shock resulting from the financial crisis was not all that extraordinary. In fact, it was rather modest in many ways when compared to other major historical bear markets. Instead, the only thing that has been truly extraordinary this time around has been the policy response. And this fact alone may be setting investors up for a far more challenging bear market experience the next time around.

Second Worst Bear Market In The New Millennium

The bear market sparked by the financial crisis was not even the worst bear market we have experienced since the calendar flipped into the new millennium. In many respects, the bear market associated with the bursting of the technology bubble was worse. This is due to the fact that the magnitude of the decline during both bear markets was effectively the same. But stocks (NYSEARCA:SPY) reached the bottom of the financial crisis bear market in a little less than half the time at 412 trading days by March 2009 versus the more than 700 trading days before stocks reached their final post tech bubble bottom in March 2003.

2000 VS 2008Now some might say that what made the financial crisis bear market worse was the sharp magnitude of the declines from October 2008 to March 2009. To this I say nonsense. These two past bear markets moved in complete lockstep for the first 300 trading days. It was not until policy makers allowed Lehman Brothers to fail when the financial crisis bear market deviated to the downside. But the net effect of this outcome was the stock market equivalent of ripping the band-aid off quickly instead of slowly. In short, the Lehman failure delivered stock investors to the bottom much more quickly, which many could argue ended up being a great advantage. For even if policy makers helped rescue Lehman the same way they saved Bear Sterns six months earlier, it still would not have alleviated the rotting mortgage debt problem that was festering in the financial system at the time. Instead, the stock market likely would have continued dying a slow and painful death into the summer of 2010 if not longer. And since policy makers seemingly felt like they screwed up by letting Lehman fail, they have been overcompensating ever since by printing trillions of new currency to support the stock market and the economy, the latter of which has been in vain.

Verdict: Bursting of the tech bubble was worse than the financial crisis for investors.

Great Depression Markets Much Worse

The bear market during the financial crisis was also mild when compared to those during the Great Depression. When matched up against the bear market from 1929 to 1932, the financial crisis market was relatively mild in comparison until the very end and was not even able to catch up to the pace of the Great Depression bear market at its darkest moments. And while the financial crisis bear market ended after 412 trading days, the Great Depression bear market lower for a few more years before finally ended down nearly -90% on a price basis.


Long-Term Care Update: 6 Trends to Watch

retired personMy Comments: The baby boom generation is going to be hit hard by this phenomena, and most of us know it. We just aren’t sure how to deal with it. This is not a solution but a needed reminder that pretending it will go away is not likely. While I disagree with their conclusion about hybrid products, it’s a good article.

by Miriam Rozen / SEP 2, 2014

Just when financial planners imagined long-term care coverage discussions couldn’t get any knottier, they managed to do so.

Long-term care insurance has prompted groans since the product’s inception in the late 1970s, taking black eyes from broad mispricings and the exits of big players like Prudential Financial.

Now three unwelcome new trends have surfaced: long-term care premiums have gotten even more expensive, benefits have shrunk, and cost of living adjustments have done the same — with the latter dropping to 3% from 5% annually, or, in some cases, withering away to nothing.

But planners might welcome other emerging trends in the long-term care insurance industry — including revised pricing and product packaging targeted at the middle market, rather than just high-net-worth clients. Those new developments emphasize portfolio protection and partial, rather than comprehensive, long-term care coverage.

While some of the changes have increased plan flexibility, expanding the types of long-term care benefits that insurers will pay, the complexity in plans’ structures has amped up, as well. A financial planner could easily lose many productive workdays reviewing the wide variety of (usually expensive) provisions for inflation protection and other riders.

Availability is an issue, too: Some financial planners grimly recall recent calls to clients, warning that they only have a week to enroll for a policy because it’s about to be pulled off the shelf. (Existing policyholders usually have more time and warning before the price hikes announced by renewal notices become effective.)

To get the biggest bang for their clients’ buck, financial planners must therefore still focus on the granular distinctions between policy bells and whistles.

“It’s impossible. The fact is that insurance companies are losing money on long-term care insurance because people are starting to use it,” says Lynn Ferraina, a partner at Ciccarelli Advisory Services in Naples, Fla., who has been advising about long-term care insurance for two decades.

“The insurance companies are starting to pay out and they are realizing the costs and that’s why they are increasing the premiums for others,” Ferraina adds. “I think it’s a national dilemma.”


“We stay educated. We go to a lot of conferences,” says Donald Haisman, an advisor in Fort Myers, Fla., who says he has offered long-term care insurance to clients for decades.

When the products first became available in the 1970s, dozens of insurance companies jumped into the market — and most coverage paid only for traditional nursing-home stays.

These days, only a few major providers — Genworth, New York Life, John Hancock and Transamerica Financial — remain in the business. But the products they offer now cover a wide range of needs for the elderly and infirm, including nursing homes, assisted living and home care services.

For help navigating the specialized area, Haisman hires — on an hourly basis — Roger Macaione, a certified financial planner who focuses on long-term care policies. Macaione receives no commissions, so he can help clients understand what they need rather than pushing product, Haisman says.

Indeed, no financial planner can afford to ignore the new developments in long-term care insurance.

Long-term care insurance providers recently introduced yet another round of prices increases, along with gender-based premium pricing. That means everyone should expect to pay considerably more for less — but particularly women.

Prices vary by location: Floridians can expect some of the highest increases; New Yorkers some of the lowest. Overall, according to the American Association for Long-Term Care Insurance, premiums have risen on average 4.8% in the past two years.

“How much higher can pricing go? I don’t know,” says Rachelle Kulback, who helps the planners at Schneider Downs Wealth Management Advisors in Pittsburgh with long-term care questions.
“We’ve had one client who simply chose to cancel,” when faced with a premium increase, says Benjamin Birken, an advisor at Woodward Financial Advisors in Chapel Hill, N.C.


Long-term care insurers have started to recognize that their industry has soured its reputation by raising premiums, halting sales of new policies, eliminating attractive options — and, debatably, offering an inherently unappealing product. (After all: Who really wants to think about long-term care?)

Haisman himself recalls that when his own father’s health began deteriorating, he initially took comfort in knowing that his father had paid premiums on a long-term care insurance policy for 25 years. But then reality set in. “The insurer would never pay; they always had a reason not to,” Haisman recalls.

Haisman says he submitted paperwork for his claims — “probably 100 documents” — but “there was always some reason that my father’s costs didn’t meet the criteria, according to the insurer, even when we he was in a hospice. … That’s why we do so much research on long-term care insurance policies for clients.”

Providers have responded to the reputational hit by attempting to simplify the structure and marketing of their products. They’re now promoting their products as a way for middle-class clients to get partial portfolio protection rather than as a total solution for all long-term care needs.

Aaron Ball, a senior vice president for long-term care insurance at Genworth — the provider with the largest share of the nearly $406 million market — says his company in late July introduced a new set of products that offer flexibility in terms of how much insurance coverage consumers buy and how they use it. The new FlexFit products let planners offer clients either budget-friendly premiums, starting as low as $100 a month, or packages priced according to asset-protection goals, starting at $100,000 of assets, he says.

Such products may appeal to advisors who understand how the costs of keeping a parent in long-term care can wipe out savings.

Of course, even $100,000 doesn’t sound like much when nursing home costs in some parts of the nation run as high as $95,000 per year. But providers, including Genworth’s Ball, stress that their products cover home care, and that typically costs much less — about $45,000 a year, on average.

As it turns out, home care services are what more than 70% of Genworth’s long-term care claimants seek.

And home care costs may be expected to drop even further, says Dallas advisor Suzanne Fitzgerald, who markets New York Life’s long-term care products. She cites two key reasons: Competition is increasing, as more companies enter the growing business, and technological advancements — such as wireless monitoring, automated pharmaceutical deliveries, and even the Uber app — are making some home care services less expensive to provide.

“There are so many home care providers now and most of my clients want in-home care,” she says. According to the AALTCI, which keeps industrywide statistics, home care claims accounted for 51% of those opened under long-term care policies in 2012, the most recent year of figures available.

Both Genworth and New York Life have attempted to make the home care services options even more attractive for their claimants by providing care coordinators — counselors who help families arrange for home care services in their own communities. Both insurers accelerate coverage (by eliminating waiting periods) for families who rely on those home care-coordinating professionals.

“We have experts in every region of the country. They know who is good and bad,” among home care providers, says Fitzgerald.


While long-term care riders can be complex and expensive, one subset should be particularly worthy of any financial advisor’s attention, says Nancy Skeans, managing director at Schneider Downs Wealth Management: spousal-sharing riders.

These new products, which emerged about two years ago, allow a couple to buy a designated number of years’ coverage — and then permit either spouse to use any of those years.

Since statistics show that long-term care needs rarely exceed three years, the spousal-sharing option makes economic sense, Skeans says: For one price, a couple gains good odds of having coverage for all their needs.

“Each person is buying two years of protection at least, but it is much less expensive than having their own policies,” Skeans says.

Another way providers have been countering the high cost of coverage is to reduce or eliminate options once seen as advantageous to purchasers.
One virtually extinct provision that was once common is the “refund of premium” benefit. If the insured died before a certain age, this provision would have paid heirs all the premium payments that the client had made, minus any benefits already paid against the policy.

Inflation provisions, too, were once a way for financial planners to help clients effectively customize plans for their needs and budgets. But most LTC carriers no longer offer what had once been an industry standard: 5% compound inflation protection.

Genworth’s new products, for instance, allow a 2% compound inflation option. And New York Life’s policies, offered in partnership with a Florida state program, no longer require compounded inflation protection for policyholders age 61 or older.

Birken, for one, thinks some clients may benefit from the reduced inflation protection — because those missing options make long-term care premiums more manageable. “The difference in cost for an inflation rider can make or break” a policy’s affordability for the client, he says.

Birken downplays the benefits of another long-term care funding alternative: hybrids. These combination products — which combine life insurance with long-term care riders — appeal to some financial advisors because they represent an easier sale; life insurance is something clients already understand.

And the hybrids form a growing part of the market, according Genworth’s Ball, whose company sold about $100 million in the products last year.

For Birken and others, though, the hybrids represent a second-rate alternative. Why? They typically offer no inflation protection and less valuable benefits than traditional long-term care insurance, he says.

Because the underwriters’ qualifying requirements are frequently “less stringent,” Birken says, “it makes them an opportunity for some folks.”

However, he adds: “We would never go with a hybrid first.”

Exactly Where We Are In This Cycle

retirementMy Comments: This is a major question for investors. Whether you are accumulating money for the future or are already retired and focused on making sure you have enough money to last, knowing what is likely to happen in the near future leads to peace of mind and financial freedom.

This is one opinion. Watch for another opinion in the next few days called “Are We There Yet?”.

Steve Sjuggerud, / Sep. 9, 2014

I was on stage at The California Club in Los Angeles… being put on the spot. And I didn’t have a good answer… It was a private meeting, so it was a small crowd of less than 50 people. At the end of my speech, I answered a few questions.

I like to give good answers when I can. But this time, I didn’t have a good answer. I fumbled around, sharing some facts. But I knew I could give a more accurate answer once I had run some numbers. I promised that I would respond more accurately in DailyWealth. So here goes…

“Steve, you did some great work on cycles years ago,” an attendee said. “So exactly where are we in this cycle, based on the last 100 years?”

He was asking for the BIG picture. I like that. Most people focus on today, and forget about the big picture. I could answer this question in a variety of ways. But the chart below is the simplest way to answer it…

The big idea is, the stock market goes in big cycles, from being loved to being hated. For example:
• Stocks were loved in the decade of the “Roaring Twenties.” Then they crashed in the Great Depression, and then World War II came along.
• Stocks were loved in the 1990s, then spent much of the 2000s going nowhere, delivering no return at all, really (when you adjust for inflation).

The question is ultimately getting at this: After soaring since 2009, are stocks overly loved right now? For your answer, take a look at this chart. It shows the 10-year annualized return on stocks (after inflation).

You can see the peaks were around the Roaring Twenties, and the dot-com boom. You can see the busts around the Great Depression and the inflationary 1970s. The important thing to look at is where we are today…

Take a look:
So, where are we in this cycle? Are stocks overly loved, like they were in 1929 or 1999? Or are they overly hated, like they were in the Great Depression or the 1970s?

Based on this simple chart, we are somewhere in the middle… Stocks aren’t overly hated, or overly loved. Based on history, we are somewhere in the middle of this cycle.

I will admit, this is not the most statistically robust way to look at things… After all, there are only three of these major cycles to look at over the past 100 years. How can we say for sure that stocks will peak in the same place they peaked the last three times? We can’t.

This is simply a rough look at history. I believe it’s about right, though…

I think we’re not at the bottom, and we’re not at the top either.

I think we have a couple more innings left in this great bull market. And based on history, the last inning often delivers some of the biggest gains.

So, in short, yes, stocks have moved up a lot since 2009. But based on the last three cycles over the past 100 years, there’s still plenty of room to run…

Good investing.

Do Retirees Need Long-term Care Insurance?

retired personMy Comments: As a financial planner with thinning grey hair, my clients tend to be already retired or soon to be retired. A major worry we all face is the chance that we will slow down to the point where we need help to get from one day to the next.

Sure, family members will help, but this puts a heavy burden on them since medical science has a way of keeping us alive much longer than was the case 100 years ago. Then, the idea of being taken care of by our children was different since there was little chance of us living into our 90’s and more than likely they lived next door.

The following facts are sobering.

Rodney Brooks, USA TODAY September 10, 2014

Health care costs are a big concern for people going into retirement, but the costs of long-term care can still be a shock.

Here are a few facts:
• 70% of people over 65 will need some form of long-term care at some point.
• For married couples, the chance that one spouse will need long-term care rises to 91%, says Byron Udell, CEO and founder of AccuQuote.com.
• People living alone are more likely to need some sort of home health care.
• Women outlive men, and thus, are more likely to live alone and need some sort of home health care.

So, while some financial planners previously were on the fence about long-term care insurance, they were still encouraging people to at least have a plan for long-term care.

“For Baby Boomers, long-term care insurance is a must,” says Manhattan attorney Ann-Margaret Carrozza. “We can no longer rely upon Medicaid to cover custodial type care. We see over the course of the past few years that eligibility for Medicaid has gotten tougher. In 2006 the so-called look-back period was extended from three years to five years,” she says. During that period, the government can check, or look back, to see if you have sheltered or given away assets — and if you have, it triggers a penalty period when you’re ineligible for government aid.

“There are now proposals in Congress to increase it to 10 years,” Carrozza says. And, she warns, Medicare only covers up to 100 days of rehabilitation following hospitalization. “Beyond that — nothing!”

The Employee Benefit Research Institute says the average retirement shortfall for Baby Boomers and Gen Xers is nearly $50,000. But that rises dramatically when expenses for home health care or nursing homes are added: for married households by $25,317; single males, an average increase of $32,433; and by $46,425 for single females.

No wonder so many people are worried that they won’t have enough money to even cover health care costs in retirement, let alone make it through retirement in the lifestyle they are accustomed to.

Let’s start with the basics. Long-term care is the service, both medical and non-medical, for people with a prolonged physical illness, chronic disease or disability. That care can be administered in-home, or in an institution like a nursing home or an assisted living facility.

“Custodial care will cost an average of $200 to $300 a day,” says Udell. “In-home care is somewhat less. In smaller (cities) it’s less. Most long-term claims are actually for in-home care.”

He said the cost depends on a lot of variables, whether the care is 24 hours a day, whether a caregiver comes and goes. He said a relative has a live-in caregiver who is paid $1,200 a week, plus meals.

Meanwhile, Genworth Life Insurance Co., a leading provider of long-term-care insurance, says the average length of a long-term care insurance claim is 2.9 years for a nursing facility and three to four years for all claims, including in-home care, based on reimbursement claims data from December 1974 through December 2013.

“I think the overarching theme for us is that you have to deal with that issue (long-term care), whether you have the money to self-fund or whether you buy long-term insurance,” says David Richmond, president of Richmond Brothers, a financial and retirement planning firm in Jackson, Mich.

“It’s a really big number,” Richmond says. “Retirees are getting an idea because they are dealing with their parents. That care is not cheap and insurance will not pay for it. Once you have exhausted your 100 days, Medicare will not pay. You must plan what you will do and what it will do to your portfolio and your family.”

That said, the question is: Is long-term care insurance the answer?

Financial advisers used to be mixed on the option. But they seem to be increasingly supportive of including the insurance as part of their financial plans.

“Long-term care stays on average two and a half years,” says Joe Heider, managing principal of the Ohio region for Rehmann Financial. “That can quickly eat into estates.”

Still, he says, long-term-care insurance is not for everyone. “Some people can’t afford it. They have to take risk they will not use it or that their assets will be spent down and they will be able to use a government-assistance program.”

John Sweeney, vice president at Fidelity Investments, says provisions for health care are essential in retirement plans Fidelity creates with its clients. “Long-term care is a very personal decision,” he says. “Many people we speak to who are going into retirement expect they will cover long-term care on their own.”

Sweeney says in a recent survey of children of retirees, 45% of the children expect to take care of their parents. “If you don’t have children, a long-term care plan might make sense,” he says.

“Long-term care provides the elderly with the opportunity to stay in their home, which is where they want to be,” says George Hunter III of Hunter Capital in Columbia, Md. “Long-term-care insurance allows for that. It gives them flexibility and gives them choices. It lets them keep their lifestyle the way they want it.”
“The biggest risk is if you are married,” says Richmond. “If one of you gets sick, it can be catastrophic to the family financially.” Say you need $4,000 a month to live on and you have a family member with early-onset dementia. It costs $5,000 a month for care. “All of a sudden, what you take out of your retirement savings just doubled. There are not many plans that you can double what you take out for three or four years and still be viable,” he says.

“Talk to your lawyer, accountant, financial adviser and say if the unthinkable happens to us, what will happen, and what will we do?” Richmond says. “You are talking about what could be hundreds of thousands of dollars.”

Several things were working against the broad appeal of long-term-care insurance over the years. One is the expense. Also, the industry saw some dramatic rate increases in the past several years. And several providers got out of the business entirely.

But the issue for many potential customers was that you could pay the premium for years, and never need it.

“Historically, the big turn-off with long-term-care insurance was that all premiums paid were lost in the event policy benefits were not used,” says Carrozza. “Now, we are seeing more flexible products built around a life insurance model.”

Steve Cain, principal and national sales leader of NFP Long Term Care in Los Angeles says the average annual premium for a traditional long term care policy is $2,332. But a growing trend is the single premium life insurance policy with a long-term-care rider.

That’s exactly what Udell says he and his wife have — on life insurance policies of $1 million. “If I don’t ever need it, my family gets the million,” he says.